Thursday, December 30, 2004

Debt relief is a cause celeb, but not a panacea

It seems that you can't turn on a T.V. or read a magazine these days without seeing a celebrity extolling the virtues of Third World debt relief. Germany and Canada have called for debt relief for nations effected by the Tsunamis and the U.S. recently pressed nations to forgive billions of dollars of debt owed by Iraq. Rockers Bono and Matthew Good have even made it their personal crusade. But does debt relief really improve the nations that are forgiven or is this little more than a liberal feel-good give-away that does nothing to address the systemic problems that led to massive borrowing and default in the first place? It is certainly true that the servicing of foreign debt represents a huge percent of some of the poorest nations GDPs, but it is also true that forgiveness of that debt would simply encourage further irresponsible borrowing by these usually corrupt, inefficient and undemocratic governments. Compounding the problem is the simple fact that no one wants to loan money to nations that cannot pay their debts. Which means lower credit ratings and higher interest rates when these nations again need to borrow in order to sustain themselves. The real solution then is not tolerating poor fiscal management by allowing debtor nations to slide on their responsibilities to those who have, in good faith, loaned them money. Rather it requires taking a stick and carrot approach that grants lower interest rates and refinancing plans to nations that implement market and fiscal policy reforms while turning a deaf ear to those nations that refuse to take responsibility for their own fiscal house. It is not as sexy as whining about greedy rich countries in Rolling Stone and it isn't as dramatic as an across-the-board debt forgiveness package, but it is far more likely to create sustainable growth and a road out of poverty for nations that desperately need both.

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The desire of the masses to live free is again beginning to ripple across China; just as the economic liberalizers in the West promised it would when the effort began to pry open their markets more than ten years ago. Read more here. Far to many people on the left and right fail to recognize that civil liberties and economic freedom are inextricably linked and whenever there is one, the other will come rushing in like a flood because the longing for self-determination is not qualified by the nature of the freedom, but rather by freedom itself.